Question 1

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

Accepted Answer

A) 0.57 percent 
B) 2.00 percent 
C) 5.69 percent 
D) 56.87 percent $100,000 = $17,000

Question 2

Sometimes, comparing project NPVs properly can be surprisingly tricky.What are three important, but often challenging decisions of such?

Accepted Answer

The answer of Sometimes, comparing project NPVs properly can be...

Question 3

The investment timing decision is aimed at analyzing whether the:

Accepted Answer

A) Cash flows occur at the beginning or end of a year 
B) Payback period or NPV analysis should be used 
C) Project is a borrowing or lending project 
D) Investment should occur now or at some future point

Question 4

"While IRR may be easier to understand than NPV, NPV should be used as a final decision criterion for an investment." Do you agree with the above statement? Why or why not?

Accepted Answer

The answer of "While IRR may be easier to understand...

Question 5

When a Project's internal rate of return equals its opportunity cost of capital, then:

Accepted Answer

A) The project should be rejected 
B) The project has no cash inflows 
C) The net present value will be positive 
D) The net present value will be zero

Question 6

When we compare assets with different lives, we should select the machine that has the lowest equivalent annual annuity.

Accepted Answer

A) True 
 B)False

Question 7

If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:

Accepted Answer

A) The profitability index to exceed 1.0 
B) The opportunity cost of capital to be too low 
C) The IRR to exceed the opportunity cost of capital 
D) The NPV to be zero

Question 8

Find the IRR for a project costing $36,500 and returning $5,000 annually for the first four years, followed by $11,000 annually for three years.Hint: At a discount rate of 7 percent the Project's NPV is $2,458.91 and changes to -$1,966.86 at a discount rate of 10 percent.

Accepted Answer

The answer of Find the IRR for a project costing...

Question 9

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.

Accepted Answer

The answer of The use of NPV as an investment...

Question 10

Pari Corporation is planning a 20 year project with an initial investment of $10 million.The project will have $50,000 cash outflows per year in years 1-4; $300,000 cash inflows in years 5-15, and $15,000 cash inflows in years 16-20.Determine the projects rate of return.

Accepted Answer

A) -10.57% 
B) -9.81% 
C) -5.51% 
D) 10.92% Using the BAII Plus Calculator:

Question 11

Project A has an IRR of 20 percent while Project B has an IRR of 30 percent.Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects?

Accepted Answer

A) Project A is more risky 
B) Project A requires a smaller initial investment 
C) Project A requires a larger initial investment 
D) Project A requires cash outflows in the final period

Question 12

Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000.If the company's required return is 10%, determine its discounted payback.

Accepted Answer

A) 3.27 
B) 3.43 
C) 3.79 
D) 4.01

Question 13

How is the profitability index calculated, and how can it be used to choose between projects when funds are limited?

Accepted Answer

The answer of How is the profitability index calculated, and...

Question 14

If the NPV of a project is greater than 0, then its profitability index is:

Accepted Answer

A) Greater than 1 
B) Greater than 0 
C) Less than 1 
D) None of these

Question 15

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years.At most, this project has ______ different IRR(s).

Accepted Answer

A) One 
B) Two 
C) three 
D) five

Question 16

When choosing among mutually exclusive projects, the choice is easy using the NPV rule.As long as at least one project has positive NPV, simply choose the project with the highest NPV.

Accepted Answer

A) True 
 B)False

Question 17

If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n):

Accepted Answer

A) Positive NPV 
B) Negative NPV 
C) Acceptable payback period 
D) Positive profitability index

Question 18

When hard capital rationing exists, projects may be accurately evaluated by use of:

Accepted Answer

A) Payback period 
B) Mutually exclusive IRRs 
C) A profitability index 
D) Borrowing, rather than lending, projects

Question 19

The "gold standard" of investment criteria refers to:

Accepted Answer

A) Net present value 
B) Internal rate of return 
C) Payback period 
D) Profitability index

Question 20

Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.

Accepted Answer

A) True 
 B)False

Exam 8: Net Present Value and Other Investment Criteria

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

Sometimes, comparing project NPVs properly can be surprisingly tricky.What are three important, but often challenging decisions of such?

The investment timing decision is aimed at analyzing whether the:

"While IRR may be easier to understand than NPV, NPV should be used as a final decision criterion for an investment." Do you agree with the above statement? Why or why not?

When a Project's internal rate of return equals its opportunity cost of capital, then:

When we compare assets with different lives, we should select the machine that has the lowest equivalent annual annuity.

If a Project's expected rate of return exceeds its opportunity cost of capital, one would expect:

Find the IRR for a project costing $36,500 and returning $5,000 annually for the first four years, followed by $11,000 annually for three years.Hint: At a discount rate of 7 percent the Project's NPV is $2,458.91 and changes to -$1,966.86 at a discount rate of 10 percent.

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.

Pari Corporation is planning a 20 year project with an initial investment of $10 million.The project will have $50,000 cash outflows per year in years 1-4; $300,000 cash inflows in years 5-15, and $15,000 cash inflows in years 16-20.Determine the projects rate of return.

Project A has an IRR of 20 percent while Project B has an IRR of 30 percent.Under which of the following situations might you be inclined to select Project A, assuming the projects to be mutually exclusive, lending projects?

Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000.If the company's required return is 10%, determine its discounted payback.

How is the profitability index calculated, and how can it be used to choose between projects when funds are limited?

If the NPV of a project is greater than 0, then its profitability index is:

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years.At most, this project has ______ different IRR(s) .

When choosing among mutually exclusive projects, the choice is easy using the NPV rule.As long as at least one project has positive NPV, simply choose the project with the highest NPV.

If the opportunity cost of capital for a project exceeds the Project's IRR, then the project has a(n) :

When hard capital rationing exists, projects may be accurately evaluated by use of:

The "gold standard" of investment criteria refers to:

Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.